📰No Rate Cut | Daily India Briefing

Today’s deep dives: RBI keeps rates the same. Domestic banks will finally be allowed to directly finance mergers and acquisitions. Indian households expect weaker inflation.

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Macro

• The RBI unveils various steps to increase international acceptance of the rupee. The first includes publishing various reference rates against the rupee including the dirham, dollar, euro, rupiah, pound, and yen. Another is to allow special overseas accounts to buy corporate and commercial bonds. These moves will allow banks to quote more currency pairs more directly. 

• The 10YR yield fell 6 basis points after dovish comments even with a RBI hold. The bond appreciation gained momentum as Governor Malhotra signaled a future dovish tilt in addition to the government announcing less long-term borrowing. Two MPC members also voted for a more accommodative stance in rate cuts, leading to even more bullish takes by traders. 

• India's Russian oil imports slowed to 1.6 million bpd from 1.7 a month earlier. Russian flows have slowed by 16 percent due to the punitive 50 percent tariff placed on India. While the government has signalled to continue buying Russian crude, the level has flattened since Russian cargoes are just $1 cheaper now.

Equities

• The RBI raised IPO loan limits to $28,200 (₹2.5 million), more than double the current cap. Individual investors can now invest more, which should continue boosting the level of oversubscription for different IPOs as well as investor interest. Regulatory ceilings on lending against shares have also been reduced. 

• Expect IT earnings to lack drama with results mostly flat. Revenue growth will likely be 0-1 percent up though visa costs, wage hikes, and competition could cause costs to rise. Valuations still offer a buffer with the Nifty IT trading at a 10 percent premium to the Nifty 50. 

• Indian stocks are expected to rise 5.5 percent from now until year end. Investor views show that people expect Chinese stocks to cool with flows shifting to India. Beyond just idiosyncratic performance, lower consumption taxes and bullish regulation from the RBI should help India further. 

• India is poised for its biggest even IPO month with $5 billion (₹430 billion) in deals. Tata Capital and LG Electronics headline October. Strong inflows from domestic mutual funds have offset international flows exiting. Other big deals include WeWork India at $338 million (₹30 billion) and Pine Labs at $698 million (₹60 billion). 

• Canara HSBC is raising $300 million (₹26.1 billion) as an insurance unit owned by HSBC, Canara, and Punjab National Bank.The company filed its draft prospectus back in April and was just approved this month. Deliberations are still ongoing, with details subject to change.

Alts

• MUFG seeks a 20 percent stake in Shriram Finance for $2.6 billion (₹223.6 billion). The investment would happen through a primary issuance with a preferential allotment; the Economic Times also reported that MUFG could eventually seek a controlling interest. Shriram is a shadow bank vital for growth of private companies in India, making MUFG’s interest a way for the bank to continue growing its international presence. 

• India is outsourcing geopolitical investigations to hasten hydropower approvals to reach green goals. The CEA is hiring external experts to verify investigations since those agencies are short-staffed. India has only installed 50 GW of the 150 expected by 2023 due to setbacks. 

• Metals are shining as a safe haven hedge. The NSE Metal Index has risen by 16 percent while local stocks have been struggling. China’s output cuts have also caused supply to tighten and prices to widen. 

• India is launching daily expiries for Nifty 50 options in GIFT City.The move comes as a reversal from previous changes where SEBI and the RBI limited options trading. These daily options target global investors who can access Indian assets under GIFT frameworks.

Policy

• Pakistan is seeking US investment in energy, mining, and technology. Islamabad is planning an investment conference in DC in October. Economic links have already grown due to a $500 million (₹43 billion) investment from US Strategic Metals and a new 19 percent tariff rate for Pakistan. The IMF is also reviewing its $7 billion (₹602 billion) program to continue providing aid.

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1. Rates Stay Unchanged

The RBI kept its benchmark repurchase rate unchanged at 5.5 percent on Wednesday, while signaling space to cut borrowing costs in the coming months as the economy absorbs the shock of US tariff hikes. The unanimous decision by the MPC was broadly in line with expectations and reflects the central bank’s cautious balancing act between growth risks, currency pressures, and inflation dynamics.

Governor Malhotra said the pause was “prudent” to allow the impact of earlier policy actions including tax cuts and 100 bps of rate reductions this year to filter through the economy. Still, he hinted at an easing bias, since current macro conditions and the outlook have opened up policy space for further supporting growth.

Markets responded positively: equities rebounded after an eight-day losing streak, the rupee firmed, though sovereign bonds weakened on reduced expectations of immediate rate relief. The central bank also raised its FY26 growth forecast to 6.8 percent from 6.5 percent, citing strong momentum and fiscal support, while lowering its inflation projection to 2.6 percent, well below the 4 percent target. Favorable food price trends have contributed to the softer inflation outlook.

The decision underscores the MPC’s dilemma. On one hand, subdued inflation and tariff-induced growth risks argue for rate cuts; on the other, the rupee has made policymakers wary of fueling further capital outflows. The RBI’s choice reflects a bias toward currency stability, though withholding cuts could paradoxically deepen equity outflows and add pressure on the currency.

Economists see scope for 25–50 bps of easing later in the fiscal year if tariff effects intensify. For now, the neutral stance leaves the RBI flexibility to pivot quickly. External members Nagesh Kumar and Ram Singh have already advocated moving toward accommodation, highlighting a potential shift if growth weakens further.

Alongside the rate decision, Malhotra outlined measures to bolster the rupee’s international role, including setting transparent reference rates for major trading partners’ currencies and allowing overseas rupee balances to be invested in corporate bonds and commercial paper. These steps aim to deepen offshore rupee liquidity, reduce dollar dependence, and enhance resilience against volatility.

2. Domestic Banks Can Finally Directly Finance M&A

Domestic banks will finally be allowed to directly finance mergers and acquisitions, a landmark policy shift that could reshape India’s $40 billion-plus M&A market. RBI Governor Malhotra announced the forthcoming framework on Wednesday, alongside a set of broader regulatory relaxations, after the central bank held rates steady.

Currently, Indian banks are barred from directly funding acquisitions due to asset-quality concerns, leaving corporates reliant on non-banking financial companies (NBFCs), foreign lenders, and capital markets. By lifting this restriction, the RBI is opening a new channel of domestic liquidity for corporate takeovers, at a time when deal activity is accelerating on the back of healthier corporate balance sheets, multi-year low bad loans, and robust domestic demand.

The policy is likely to have competitive ramifications. Analysts note that foreign banks, which have historically benefited from this regulatory gap, could lose market share as state-run and private lenders gain access to high-rated M&A financing opportunities. The Nifty Bank index rose 1.4 percent on the news, reflecting optimism that expanded lending avenues will boost profitability.

The M&A funding proposal came alongside other liberalizations: removal of caps on lending against listed debt securities, higher limits for loans against shares, and greater discretion for boards to manage overlaps between banks and group entities. The RBI also confirmed that its expected credit loss (ECL) framework will apply from April 2027, with a five-year glide path, shifting banks toward forward-looking provisioning standards.

The measures highlight a central bank confident in the resilience of India’s banking sector after years of cleanup. This time last year, the RBI was working on cleaning up weak asset bases and poor loan quality.

By equipping lenders to participate in M&A financing, the RBI is not only deepening the local credit market but also aligning policy with the country’s corporate consolidation wave. If executed prudently, the move could reduce reliance on offshore financing, strengthen domestic banks’ role in capital formation, and support India’s broader growth ambitions.

3. Indian Households and the RBI Expect Weaker Inflation

Indian households expect price pressures to ease in the coming months, even as they report a slight uptick in current inflation, according to the RBI’s latest surveys.

The September round of the inflation survey, conducted between Aug 28 and Sept 6, showed households perceived current inflation as 20 basis points higher than in July, reversing part of the sharp decline seen earlier. Looking ahead, however, expectations fell: median inflation for the next three months dropped by 20 bps, while one-year-ahead expectations fell by 30 bps. Importantly, households reported broad-based moderation across food, non-food items, housing, and services, suggesting price pressures are expected to cool more generally.

These findings align with the RBI’s own revised inflation outlook. On Wednesday, the central bank held its policy rate steady at 5.5 percent but cut its FY26 inflation forecast to 2.6 percent from 3.1 percent, citing favorable food supply conditions.

A parallel survey on consumer confidence also showed marginal improvement in both urban and rural areas, with sentiment for the year ahead firmly in optimistic territory. The surveys reinforce the RBI’s dovish tilt: while near-term inflation perceptions remain sticky, households and policymakers alike see disinflation taking hold over the medium term. Together with improved consumer sentiment, this creates more policy space for the central bank to prioritize growth if tariff-related headwinds intensify.

See you tomorrow.

Written by Eshaan Chanda & Yash Tibrewal. Edited by Shreyas Sinha.

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